The requirement for further reform of Irish corporate rescue mechanisms has been put into sharp focus by the current Covid-19 crisis. In particular the need for a suitable rescue mechanism for small companies which is less costly than Examinership but at the same time more practical and effective than a Scheme of Arrangement.
The Company Law Review Group (“CLRG”) has considered this matter previously most notably in its report on “Proposals to Reduce the Cost of Rescuing Viable Small Private Companies” in September 2012. Although that report had a number of suggestions, the only recommendation that was subsequently implemented related to the ability of small Companies to apply to the Circuit Court as opposed to the High Court for the appointment of Examiner. This so called “Examinership Lite”, which was really a misnomer as it did nothing to reform the underlying process, has been of limited benefit with any gains from the Circuit Court application probably being outweighed by practical inefficiencies.
The 2012 Report’s other recommendations included, subject to further assessment, the introduction of a simplified non-judicial administrative examinership appointment process. However, it has taken the current pandemic to put this, and further reform, firmly back on the agenda. The CLRG’s recent “Report advising on a legal structure for the rescue of small companies” was finalised in October 2020 and placed on the CLRG’s website just before Christmas.
A summary of its recommendations, which if implemented would represent a true “Examinership Lite”, include the following:-
- It recommends the new procedure would be named “Summary Rescue Process” and it would be distinct from examinership.
- It would be available to small companies as defined by the CA14 i.e. fulfilling two of the following three criteria: (1) annual turnover of up to €12 million, (2) a balance sheet total of up to €6 million and (3) up to 50 employees.
- It would commence on a resolution of the Company’s directors as opposed to a Court Application.
- It is recommended that the process would run for a shorter period than Examinership (Examinership normally has a 100 day maximum period, however an extension to 150 days is currently available due to Covid). A suggested timetable proposes Creditors’ Meetings being held within 50 days, and the scheme coming into effect after a further 14 day waiting period should no notice of objection be issued by any creditor or Court approval be required for any aspect of the scheme.
- An Insolvency Practitioner would be appointed to oversee the process advising on the suitability of the Company for the process and on the preparation of a rescue plan and scheme for approval by the creditors.
- The voting threshold for approval of the plan would be by simple majority of 50% +1 in value as in examinership rather than the 75% vote required in a Scheme of Arrangement. Additionally, any such approval of a scheme should be binding on all classes of creditors.
- The possibility of approval of a rescue plan without an application to Court should be examined, provided there is no objection from any creditor involved.
- The safeguards against irresponsible and dishonest behaviour of directors that apply in liquidation should apply to the new process.
- The Report outlines that any such process would differ from Part 9 Schemes of Arrangement in a number of ways including the requirement for the involvement of a qualified insolvency practitioner, it would involve a more detailed commencement process and filing obligations, the lower simple majority voting threshold noted above and having a more prescribed engagement with a supervisory authority.
- The main differences from Examinership would include not requiring commencement by order of the Court, not having automatic protection from creditors (but introducing a requirement for Court consent for creditors to issue or progress proceedings), having separate filing requirements and a different final approval process – with the overall aim of simplifying the process and reducing the cost.
The publication of the Report is to be welcomed, and although there is still significant work to be done in agreeing the fine detail of any legislation, the urgent need for such a process is clear. However, it will be important to ensure that any new procedure is fully fit for purpose and that it includes necessary safeguards against abuse.
As we emerge from the pandemic during 2021 into a likely economic crisis, government supports will over time be withdrawn and creditor forbearance will run out, consequently small business owners still standing will be looking to implement strategies to ensure the survival of their Companies into the future, putting the effects of the current crisis behind them.
Having seen the apparent success of the accelerated development and approval of the various vaccines, that should in time bring the health crisis to an end, there will be a hope and expectation that the introduction of this potential “shot in the arm” for ailing small businesses will be similarly accelerated to deliver the required legislation as soon as possible.
For more information on how we can help you and your business navigate these uncertain times please contact Stephen Scott, Head of Restructuring and Recovery Services, Smith & Williamson Freaney Limited or any of the Smith & Williamson Team.
The above article is based on a “Report advising on a legal structure for the rescue of small companies” by the Company Law Review Group dated 22 October 2020 published on its website just prior to Christmas.
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